Richard North, 23/11/2017  
 

000a Export-023 Brexit.jpg

The OBR economic and fiscal outlook published this month, on which Mr Hammond based his budget plans, has some interesting contents, not least the reduced growth forecasts which are exciting the media and various pundits.

That figure, which has excited most interest, is that the size of the economy is now forecast to be £65 billion smaller in 2020, compared with the forecast in the March 2016 Budget statement.

This is being attributed in some quarters to a Brexit effect, potentially depriving the Chancellor of around £30 billion in revenue. Borrowing is thus forecast to increase and plans for a balanced budget are now a distant dream.

Given less attention though, but of just as much significance, are the OBR's predictions for the UK's export trade following Brexit. And, confounding the more extreme optimism of the "ultras", we are told that "the process of leaving the EU and negotiating new trading arrangements is assumed to be associated with a lower trade intensity of UK economic activity".

Trade intensity, it says, has been on an upward path since the Second World War, but has risen less rapidly since the financial crisis. In the March 2016 forecast, however, the OBR had expected the upward trend to reassert itself but now, in its November 2016 forecast it moved to expecting it to reverse for a period.

As for the future, the OBR is not making any assumptions about the specific arrangements to be put in place after the UK leaves the EU. There is, it says, no basis on which to predict the precise outcome of the negotiations and other trading arrangements.

Earlier, the OBR had relied for its estimates of the size of the trade effect by averaging the results of three major external studies. These, it said, "expect the full trade consequences to take many years to materialise and make different assumptions about the speed at which the effect comes through".

On that basis, the OBR assumed that the full effect would take at least a decade to be felt. It also made the assumption that Brexit would reduce exports and imports symmetrically so the effect on net trade would be "broadly neutral.

As for the current expectations, the view is taken that it is far too early to judge whether earlier assumption remain valid. Since the OBR has no further information about the future trading relationship between the UK and the EU, it has maintained its earlier assumption, pending further information.

However, the base assumptions as to the behaviour of exports in response to Brexit are, on the face of it, somewhat conservative. Given the effects of customs delays, and the cumulative effect of non-tariff barriers, it might be wiser expect serious consequences to materialise early.

Further, given the asymmetric effect of WTO/GATT non-discrimination rules – and the exemptions afforded to preferential trade areas – one might expect that UK exports to the EU to be more adversely affected than Member State exports to the UK.

Similarly, if free trade and other trading agreements with the rest of the world cease to have effect on leaving the EU, any delays in concluding new agreements might have disproportionate effects on the UK's exports. And any effects might be magnified if the UK sought – as has been suggested by some that it should – "unilateral free trade".

As for the immediate future, export growth in 2016 has been revised down to 1.1 percent from the 1.4 percent estimated at the time of the March forecast. But, the OBR says, recent volatility in reported quarterly export growth has made interpreting the recent path of export growth difficult.

Much of this volatility, though, is attributed to cross-border transactions in gold bullion in the London bullion market. But, "looking through this volatility", says the OBR, export growth appeared to pick up at the end of 2016 and start of 2017.

This, the OBR believes, sets a strong base for calendar year growth in 2017. It now expects growth to be at 5.2 percent, significantly higher than in March due to higher-than expected outturn data. Growth then slows to 3.4 percent in 2018, as the effect of the fall in sterling starts to fade.

The forecasts for 2019 onwards, however, "are slightly lower as a result of expectations for a lower trade intensity of the UK's main export markets". But the assumption that Brexit will result in a lower UK share of EU markets is unchanged.

Bizarrely, it still expects overall export trade between 2020-22 to continue growing, albeit at 0.1 percent, reflecting a lower trade intensity of UK economic activity as a result of Brexit. That, according to the chart reproduced above, leads to a cumulative reduction of market share by 2022 of about 13 percent.

Looking at this in the round, this seems to be an extraordinarily optimistic forecast, verging almost (if not actually) on complacency. There is not the slightest hint of the turmoil that has been explored on this blog and elsewhere.

One wonders, therefore, to what extent the OBR is playing "chicken" and ducking its responsibility. The government has openly declared its policy of leaving the Single Market and that has implications for trade which lie beyond the speculative, yet this is scarcely if at all recognised.

Clearly, while the OBR cannot predict the outcome of trade talks – especially as they have not even started yet and the government has not actually issued any position papers, it does not seem right to suggest that trade is going to be (at worst) only marginally affected by Brexit.

Presumably, the OBR is capable of carrying out its own impact assessments – along the line of the mythical creatures which have yet to escape government custody – so it must know that there is a range of possibilities that we must confront – especially in relation to Single Market membership.

Even last week, we were getting complaints from the UK pharmaceutical and chemical sectors, who say they are increasingly concerned about lack of progress on Brexit negotiations, expressing worried that the level of disruption to which they could be exposed.

And if industry is largely afflicted by the complacency bug and is not yet pressing the panic buttons – which it should be doing – this is all the more reason why the OBR should be fulfilling its duty of providing "independent and authoritative analysis of the UK’s public finances".

Significant changes to the UK's export capabilities will have a major impact on GDP with a corresponding effect on tax revenue – and expenditure as unemployment mounts. Potentially, we see GDP taking a hit in excess of anywhere between £150-200 billion and the knock-on effect on revenue can be as high as 70 percent.

The OBR calls itself an "independent fiscal watchdog", which would suggest that it's job is to bark. But, despite the magnitude of the "hit" to which we are potentially exposed, we're getting more of a whimper than a bark.






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